By ARAB NEWS
Published: Dec 20, 2011 23:51 Updated: Dec 20, 2011 23:51
JEDDAH: Small and medium-sized enterprises (SMEs) are an important segment of many economies globally in terms of their contribution to GDP (gross domestic product) and employment. This importance is also apparent in some GCC (Gulf Cooperation Council) states such as the United Arab Emirates which relies on SMEs for 30 percent of its GDP and 86 percent of its employment. Similarly in Saudi Arabia, SMEs contribute to 28 percent of the GDP, according a report “Kuwait’s SMEs: Looking for a Champion” released Tuesday by Kuwait Financial Centre (Markaz).
Kuwait, on the other hand, has been a late comer in unlocking the potential role that SMEs can play in its economy. Kuwaiti private sector and SME contribution to employment lacks luster, whereby approximately 85 percent of the Kuwaiti work force is currently employed by the government. Historically, the private sector, although growing, has been unable to create enough jobs for nationals. This scenario is clearly unsustainable; with a growing population, the public sector will inevitably be limited in its ability to offer employment to all. It is therefore imperative that the SME segment in Kuwait be developed to play an important role in employment creation over the coming years.
Notwithstanding, Kuwait, like its neighboring states, is taking notice of the contribution of SMEs to employment and to GDP, and hence, is developing programs to support the segment. SMEs are expected to have a significant role in Kuwait’s economy moving forward. In early 2010, Kuwait’s Parliament members presented a draft bill to establish an independent SME authority to assist in creating new channels for employment and diversifying Kuwait’s economic base. In late 2010, comments by the deputy prime minister for economic affairs indicated that the next four years would witness the establishment of 400 SMEs in Kuwait.
Given the expected important role that Kuwait’s SMEs are envisaged to play in coming years, it would be prudent to maximize support for these budding entities. Such support would not only be through the requisite finance, but through the development of a comprehensive framework by which they could participate in and benefit from the upcoming proposed projects in the country, the Markaz report said.
Local content policy
Globally, local content policies and SME assistance programs have long been in effect, and widely successful in many nations. Several countries including Norway, Brazil, Malaysia, Venezuela, Russia, Nigeria, and Saudi Arabia have set ambitious local content targets. On the other hand, SME assistance programs have been hugely successful in the Australia, United States, Canada, Japan and Korea.
In Saudi Arabia, the General Engineering Services Plus contracts (GES-Plus) that Saudi Aramco has implemented, are a good example of local content policies within the GCC. In April of this year, Kellogg, Brown, and Root (KBR) was awarded a five-year GES-Plus contract that allows the company to implement material procurement, project management services, and FEED programs supporting Saudi Aramco’s $130 billion spending program. The contract requires KBR to train and hire local Saudis for the project. KBR will use a newly created engineering company in partnership with a local Saudi consulting and engineering company to provide the contracted services and will operate exclusively in the Middle East.
In developing countries such as Nigeria, the Oil and Gas Industry Content Development Act of 2010 contains provisions to enhance local participation in all aspects of oil operations. These include specifying minimum amounts of local materials and personnel used by oil & gas operators in the country.
The Markaz report said in the United States, the Small Business Administration (SBA) was created in 1953 as an independent agency of the federal government under the Small Business Act, whose function was to “aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns.” The charter stipulated that the SBA would ensure small businesses a “fair proportion” of government contracts and sales of surplus property.
In Europe, the Small Business Act for Europe (SBA) adopted in June 2008, reflects the European Commission’s political will to recognize the central role of SMEs in the EU economy, and puts into place a comprehensive SME policy framework for the EU and its Member States. The European Commission has prepared the “European Code of Best Practices Facilitating Access by SMEs to Public Procurement Contracts”. In United Kingdom it is proposed to award 25 percent of public contracts to the SMEs.
In November 2011, India, finalized the Public Procurement policy, which will make it compulsory for government departments and public sector units (PSUs) to source 20 percent of their procurement needs from micro, small and medium sized enterprises.
The Victorian Industry Participation Policy (VIPP) of the Australian state of Victoria is a notable example of a successful local content policy geared toward stimulating the growth of SMEs. The VIPP is intended to foster industry development by encouraging bidders to genuinely consider local (Australian and New Zealand) SME suppliers while preparing their tenders.
The continued buoyancy of oil prices has allowed GCC states to maintain their commitment toward continued investment in projects for growth and development. Over the next decade, the GCC states are planning 1,638 major projects worth more than $968 billion across various sectors. Over 80 percent of these projects are construction, infrastructure, and petroleum industry related projects, the report said.
By any standard, these projects are significant undertakings that require an integrated, coherent, and compatible set of systems and policies that will cater for effective and efficient execution toward a successful outcome. Many of the GCC states have recognized the need for accelerating and facilitating the execution of these projects though mechanisms such as public private partnerships (PPP), foreign direct investments (FDI), joint venture arrangements amongst others.
Kuwait’s share of these projects stands at 218 projects worth over $133 billion, over the next ten years. However, Kuwait, unlike its sister states, has been reserved in project spending and project award, despite its considerable financial wealth. The deadlocked political environment and slow decision making are mainly to blame for many projects such as the Subiya Causeway, Failaka Island development, Al-Zoor refinery, and the Bubiyan Port project being delayed for years. This sluggishness in spending reflects directly on the country’s slow GDP growth over the past years. Kuwait’s GDP growth rate has been dull compared to its neighbors.
Despite the current scenario, the Markaz report said Kuwait has taken some commendable steps toward exploring more efficient frameworks. In particular, Kuwait is amongst the first movers in the Middle East to embrace Public-Private Partnerships (PPP) as an alternative means of financing and accelerated execution to modernize and upgrade its infrastructure. It has announced ambitious plans to develop more than 30 PPP projects worth over $28 billion, and is one of three GCC countries that have implemented legislation formalizing the framework for PPP projects.
SMEs are likely to become the linchpins of Kuwait’s growth in the coming years. Beyond the economic case for including SMEs into the mix, there are other factors that bolster the case for SME participation, including the potential for technology and knowledge transfer as a result of partnerships with more sophisticated players. It also presents a catalyst toward accelerated and improved development of Kuwait’s human capital. SMEs will also benefit from adopting advanced business systems, procedures and policies that would bolster their competitive position in the marketplace.
It is apparent that in the coming years, SMEs in Kuwait will be expected to play a critical role in contributing to employment and GDP. There is also a sea of opportunities in the planned major projects which are currently focused on the larger and more sophisticated players. “We believe that in order for Kuwait to embark along a path that would drive its economy to expand beyond being fully dependent on oil, it is not only prudent, but necessary to effect policy changes that assist SME’s in tapping into upcoming projects, including PPP projects,” the Markaz report said.